XIC – iShares S&P TSX Capped Composite Index Fund

XIC – iShares S&P TSX Capped Composite Index Fund – was introduced on February 16, 2001, and seeks to replicate the largest and most liquid securities listed on the Toronto Stock Exchange (TSX). It is part of a group of ETFs owned by iShares, and, as of June 11, 2009, is now currently being managed by BlackRock Asset Management Canada Limited. The iShares fund family continues to lead the market amongst all the providers, managing approximately 2/3 of all the money currently invested in the Canadian ETF market. When choosing to invest in XIC, you choose to invest in the long-term capital growth of the largest companies in Canada.

What are the largest companies in Canada?

When you purchase an ETF like XIC, it is good to know what kind of companies you are investing in, as well as the sectors they do business in. This is interesting to know as you want to have diversification in your portfolio, and you do not want to focus too much of your investments in a handful of sectors. Although it does not guarantee against loss, diversification in your portfolio helps you reach your long-term financial goals while simultaneously minimizing the risk associated with it.

In Canada, the main sectors that are represented are the financial industry, the energy sector, and the materials sector. This is reflective in XIC as over 75% (as of March 30, 2012) of the fund’s holdings are in these sectors.

The following is a list of the top 10 holdings of the fund (as of March 30, 2012):

Royal Bank of Canada

5.58%

TD Bank

5.13%

Bank of Nova Scotia

4.25%

Suncor Energy Inc.

3.41%

Barrick Gold Corp.

2.90%

Potash Corp. of Saskatchewan Inc.

2.62%

Bank of Montreal

2.54%

Goldcorp Inc.

2.44%

Canadian Natural Resources Ltd.

2.44%

Canadian National Railway Co.

2.35%

Some of the companies sound familiar to you? Altogether, the top 10 holdings account for approximately 34% of the fund’s portfolio. In total, XIC currently owns shares in over 250 companies. Imagine what it would cost to buy the shares of all 250 companies individually!

Keep in mind that XIC (unlike XIU) is a cap-weighted ETF. This means that each holding is weighted by their market capitalization, but is limited to a maximum of 10%.

While holdings in both XIC and XIU are weighted based on their market capitalization, the distinction between the two is that the holdings in XIC are also capped. In other words, any one holding in XIC cannot exceed 10% of the total holdings. This helps passive investors prevent a large concentration of a single stock in their portfolio if that stock represents a large chunk of the index.

Which ETF to choose?

Once the decision of investing in the largest companies operating in Canada’s market has been reached, you will then have to decide which ETF to purchase. When making your decision, here are a couple things to keep in mind.

Management Expense Ratio (MER)

One of the biggest reasons to build an investment portfolio containing ETFs is that the costs of owning them are much lower. In Canada, although we do have the most variety of mutual funds offered of any country in the world, we also have the world’s most expensive MERs as well. In Canada, the average MER is around 2.50%, and this does not take into account any additional sales charges that an alarming number of funds also contain. With XIC boasting a MER of only 0.26%, you get almost a 2.25% head start on your portfolio’s return every year when compared to mutual funds. History has shown that only a handful of fund managers can overcome this deficit on a yearly basis, and even less can do this consistently year after year. Hey, every penny saved is nearly two pennies earned!

Tracking Error and Return

Year

XIC

Index

2002

-14.06

-12.44

2003

25.19

26.72

2004

13.58

14.48

2005

27.01

24.13

2006

16.96

17.26

2007

9.55

9.83

2008

-32.95

-33

2009

34.46

35.05

2010

17.26

17.61

2011

-8.93

-8.71

The purpose of XIC, like other index funds, is to replicate the returns of a benchmark index. In this case, XIC is designed to replicate the performance of the S&P/TSX Capped Composite Index. Therefore, the primary goal of the fund manager is to minimize the difference between the fund return and the index return. In order to determine how successful a fund manager is in accomplishing this goal, you have to look at the tracking error. Ideally, you want to purchase ETFs that have the lowest tracking error record.

The following shows the annual returns (in percentages) of XIC compared to its benchmark index. For the most part, you can see that the tracking error is pretty low, with the exception of 2005.

Dividends

Many investors choose to invest in shares of specific companies based on the dividends that they pay out. Do you still receive dividends if you invest in ETFs? Absolutely! But there is a catch! Every quarter, at the determination of the fund manager, all net taxable income is distributed back to the investor in the form of either cash or reinvestment back into the fund. These distributions include dividends received from the securities held in the fund, and realized capital gains that are generated when the fund buys and sells securities.

The timing of these distributions varies amongst the different ETF products out there. Some pay on an annual basis, while some pay as often as every month. If you intend to build a portfolio that will eventually replicate your salary, you will need to be aware of when these payouts occur. A criterion that some investors use is the timing of these distributions, as you may want the amount staggered throughout the year so it can better match your own expenses.

The most recent distribution paid out in 2012 for XIC was on March 30, 2012 at the rate of 0.13814 per share. If you owned 1,000 shares of XIC on March 23, 2012 (the ex-dividend date), you would have received $138.14 (0.13814 x 1,000 = $138.14). You can view the distributions for XIC from the ishares website.

Dividend Yield

To compare different ETFs, you may also want to compare their dividend yields. This is calculated as follows:

Current Dividend Yield = Most Recent Full Year Dividend / Current Share Price

27 Responses to “XIC – iShares S&P TSX Capped Composite Index Fund”

Michel

Apr 09. 2012

Good review of XIC. But DN, why would I pay someone do hold stocks that I can own myself. You don’t need to buy the whole index. Just 5 good dividend paying blue chip stocks from each sector and enjoy the dividend checks, on a regular basis.

Hey Michel, yah I happen to completely agree with you. But if you were only starting out, and you only had 5K or 10K to invest in equities, would it make sense to only buy one to three stocks, or an ETF like this one? 😉

Cheers!

Michel

Apr 09. 2012

You’re completely right DN, I must not forget about starters! We all started one day.

XDV is definitely a good choice if you’re starting out and want a larger focus on dividend yields! I prefer XIC for the lower MER, and the larger diversification in the underlying companies (250 companies vs. 30 companies), but will definitely consider adding this one to my portfolio if I shift my focus to dividend yields.

Vicky, nice stuff. I think XIC or XIU should be a core holding of any ETF investor. I like XIU a bit more than XIC, a) mainly because of the lower MER, b) yield is a bit higher with XIU, and c) I figure if the biggest companies in Canada aren’t making money, then few are 🙂

Actually, I use XIC and XIU, the top holdings, to help me select my Canadian dividend paying stocks to buy and hold. Investing made easy.

Keep up the good work. Will include later this week in my Weekend Reading roundup!

I don’t think you can go wrong with either XIC or XIU, and the lower MER is definitely something I have looked at in regards to XIU. That being said, I am hoping the smaller companies that are not represented in XIU have a greater growth potential, but we will see how this fares out in the next few years. However, it is definitely something I have considered adding to supplement my Canadian equities portion of my portfolio.

Looking at XIU and XIC to pick your Canadian dividend paying stocks is such a great idea!

Peter

Apr 09. 2012

XIC and XIU are both good. Another option is VCE, which is the cheapest, and holds around 100 stocks I believe, as supposed to 60 for XIU and 250 for XIC.

And if someone is really just starting out with a small amount, then TD e-series would be a better bet, as there is no brokerage commissions.

Definitely have my eye on VCE; I love everything Vanguard! 🙂 Just wanted to give them a bit of time to make sure they’ve got their act together up here in Canada, but I can imagine the volume of VCE should pick up nicely.

le

Apr 09. 2012

“Keep in mind that XIC (unlike XIU) is a cap-weighted ETF. This means that each holding is weighted by their market capitalization, but is limited to a maximum of 10%.”

Shouldn’t it read that XIC is a “capped etf” because XIU is cap-weighted, like XIC, but not capped.

I see what you mean and where the confusion may arise for some. Both XIC and XIU hold companies based on the size of their market capitalization. The difference is that the size of a specific holding in XIC is capped at 10%, while XIU does not have that restriction. Hopefully that clarifies it a bit!

Le

Apr 09. 2012

I wasn’t seeking clarification for myself. I was pointing out that the paragraph was misleading/wrong.

“Keep in mind that XIC (unlike XIU) is a cap-weighted ETF. This means that each holding is weighted by their market capitalization, but is limited to a maximum of 10%.”

This sentence implies that XIU is not cap-weighted, which it is. I was trying to point out that the distinction is not that one is cap-weighted while the other isn’t, it is that XIC is capped while XIU is not.

Hey Le that’s my error as I added the bracketed comment in – not Vicky’s.

XIU may be “capitalization weighted” by the biggest companies in the TSX, but it doesn’t prevent any one holding from dwarfing the index – the infamous “Nortel Effect”. XIC as you already know, allows no more than one holding to exceed 10% of the index, so any given holding is “capped” at 10%. The Canadian Capitalist also writes it quite well:

Good thing mentioning VCE, it tracks the same index as XIC MSCI Canada Index. You can go to stockcharts.com and type in (without the quotes): “XIC.TO:$WPB” to see XIC vs the MSCI Canada Index. Then do the same for “VCE.TO:$WPB”.. I was surprised to see that over the default time interval VCE had less of a tracking range delta. However VCE has not paid out any dividends (yet) since it was only conceived late last December..

VCE is definitely a good option in this case, especially if they keep up with their tracking range delta. MERs are also competitive as well. It is also interesting to note that it falls in between XIC and XIU in regards to the number of holdings (about 100 companies).

I’m not aware of any place that XIC trades for free; I would definitely be all over that! 🙂 The best ways to reduce costs is to trade less often (maybe every 6 months or annually) and find discount brokerages with cheaper commissions (Questrade’s commission to buy XIC is $4.95).

[…] stocks never would have crossed my mind. But when staff writer Vicky recently wrote her post on XIC, and her current post coming up on XIC versus XIU, I was intrigued to see both Barrick and Goldcorp […]

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